This Chart May Drive A Stake Through The "Austerity" Approach To Recessions

Remember 2010, when everyone was arguing about whether
governments hit by the Great Recession should be cutting their
way back to health?

Here's a chart that shows the cutters were probably wrong.

The Center for Economic And Policy Research's Ben Wolcott
has calculated the magnitude of countries' attempts to
balance their books through austerity, versus ones that took a
less severe approach.

"...If the pain caucus predictions were correct, we would expect
to see a strong positive correlation between changes in the
structural balance and employment rate," he writes. "In this
worldview, as countries like Greece and Spain cut their budgets
in order to qualify for international support, increased
confidence in financial markets would return them to full
employment quickly."

That didn't happen. The X-axis below shows the extent to which
countries tried to achieve greater structural (i.e. non-cyclical)
fiscal "balance" through spending cuts and tax increases. The
Y-axis shows employment. Nearly every country that kept
government spending mostly the same, or even increased it, in the
throes of the Great Recession now has higher rates of employment
four years on.

Those who attempted to convince the market of its fiscal
discipline do not.

This image very crisply
suggests what Keynesians have been arguing in more nuanced ways
for four years, namely that many countries cut fiscal spending
too soon, prolonging the negative impacts of the Great Recession
for workers.

Wolcott goes on to note how this phenomenon has played out in
Japan:

No country has a debt level
anywhere near Japan’s which is now approaching 250 percent of
GDP. Nonetheless the country’s new Prime Minister, Shinzo Abe,
pushed through a vigorous stimulus program that began to take
effect early in 2013. The economy responded as would be predicted
by textbook Keynesian economics, growth accelerated, the
inflation rate increased modestly, and the employment to
population ratio rose by 1.7 percentage points, the equivalent of
4 million new jobs in the United States.

No one is suggesting fiscal discipline is never called for. But
this chart shows that it's a really bad idea to go for it when
everything is collapsing.